Volume 1981
Article 19
1-1-1981
Chapter 16: State and Local Taxation
James A. Aloisi Jr.
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Taxation-State and Local Commons
Recommended Citation
CHAPTER 16
State and Local Taxation
JAMES A. ALOISI, JR. •
§ 16.1. Real Estate Taxation- Disproportionate Assessment. An issue
continually addressed by the Supreme Judicial Court has been the legality of the disproportionate assessment of real property by local officials. The Massachusetts Constitution requires local assessors to assess uniformly real property at full and fair cash value. • Widely disparate valuations, however, "have long been the rule rather than the exception throughout the
Com-monwealth ."2 During the Survey year, the Court decided three cases
relat-ing to the remedial mechanisms available to a taxpayer whose real property
has been disproportionately assessed. 3
In French v. Assessors of Boston, 4 the Court upheld an Appellate Tax
Board decision that single-family residences could, in appropriate
circum-stances, comprise a class for purposes of the so-called Tregor remedy.' In
1979, the Court held in Tregor v. Assessors of Boston6 that owners of
over-assessed Boston property were entitled to property tax abatements which would result in their tax rate equalling the average assessment of the most favored class (i.e., the lowest substantial class) of property in their
com-munity. 7 The question in French was whether, for purposes of determining
the "most favored class," one was limited to the four major classes
(resi-• JAMES A. ALOISI, JR. is ·an Assistant Attorney General of the Commonwealth of Massachusetts. The views expressed here are his own.
§ 16.1. ' The Massachusetts Constitution has, since its adoption in 1780, mandated that the legislature, in the exercise of its power to tax, impose ''proportional and reasonable assess-ments, rates and taxes, upon all the inhabitants of . . . the said Commonwealth." MASs.
CoN-ST. part 2, C. 1, § 1, art. 4.
' Town of Sudbury v. Commissioner of Corporations and Taxation, 366 Mass. SS8, S63, 321 N.E.2d 641, 64S (1974).
' A taxpayer must fJle for an abatement with his local board of assessors within 30 days of the receipt of his tax bill. G.L. c. S8, § S9. If unsuccessful with his initial appeal, the taxpayer may file a timely appeal to the Appellate Tax Board, G.L. c. S8, § 6S, and ultimately to the Supreme Judicial Court. G.L. c. S6A, § 13. The failure to make a timely appeal is a jurisdic-tional defect which is fatal to a claim of disproportionate assessment.
• 1981 Mass. Adv. Sh. 1048, 419 N.E.2d 1372. ' Id. at 10SO, 419 N.E.2d at 1374.
• 377 Mass. 602, 387 N.E.2d S38 (1979).
436 1981 ANNUAL SURVEY OF MASSACHUSETIS LAW § 16.1
dential, commercial, industrial, and open space), or whether one of the various sub-classes (i.e., single family residences) could qualify as a "most favorable class." The Court upheld the Appellate Tax Board's finding that single family residences were "one of the two or three largest classes of real
property" in Boston,~• and that accordingly such residences could comprise
the "lowest substantial class" of real property in the city for purposes of determining the amount of an abatement. The formula applies in all tax
years prior to fiscal year 1980, and after fiscal year 1983.9
In
D'Errico
v.Board of Assessors of Woburn,
10 the Court addressed numerous property tax remedy issues. The plaintiff taxpayer brought an ac-tion in superior court seeking a declaraac-tion that taxes assessed on his prop-erty by the City in fiscal1974, 1975 and 1976 were based upon illegal assess-ments, and that he was entitled to recover a portion of his property taxes paid in those years. The taxpayer's complaint, brought as an action forcon-tempt pursuant to chapter 231A, section 5,11 was premised upon findings
made with respect to the City's assessing practices in an earlier Appeals
Court decision,
Chomerics, Inc.
v.Assessors of Woburn.
12In
Chomerics,
several commercial and industrial taxpayers in the City ofWoburn sought relief from allegedly excessive assessments.13 The trial court
judge in
Chomerics
determined that the City's assessment practices wereil-legal, and ordered refunds for each named plaintiff.14 The judge also
awarded prospective relief, requiring the city to assess all property
uniform-ly and at full value." The taxpayer in
D'Errico
sought to participate in theretrospective relief mandated by the Court in
Chomerics
by filing his ownpost-Chomerics
lawsuit. At the same time, he failed to perfect hisabate-ment appeal rights16 - a tactic he no doubt came to regret.
' Single family residences were found to be the largest class in Boston in terms of area, members of parcels, and total assessed for estimated full value. 1981 Mass. Adv. Sh. at 1050, n.4, 419 N.E.2d at 1373, n.4.
' E.g., Keniston v. Assessors of Boston, 1980 Mass. Adv. Sh. 1485, 407 N.E.2d 1275. •• 1981 Mass. Adv. Sh. 1859, 424 N.E.2d 509.
" Id. at 1860, 424 N.E.2d at 510. G.L. c. 231A, § 5, inserted by St. 1974, c. 630, § 3, pro-vides, in relevant part:
when a decree has already been entered declaring an administrative practice or proce-dure as defined in section two to be illegal, and a person not a party to the original ac-tion involving said practice or procedure is adversely affected by the same . . . said person may seek relief under this chapter by filing a petition for contempt against the agency or agent continuing said practice or procedure after the entry of said decree. 12 6 Mass. App. Ct. 394, 376 N.E.2d 1246 (1978).
" Id. at 395-97, 376 N.E.2d at 1246-47.
•• Id. at 396, 376 N.E.2d at 1247. The case was not brought as a class action.
"Id.
D'Errico advanced several novel legal theories in his quest for relief. First, he sought a declaration that his assessments had been illegal, relying
on the relaxed standard for declaratory relief in tax cases articulated in
Syd-ney v. Commissioner of Corporations and Taxation. 17 The Court was not
persuaded to issue a declaration under this standard because D'Errico failed
to meet any of the Sydney prerequisites: he failed to raise a new or recurrent
issue, the issue raised was not novel (since it had been fully litigated in
· Chomerics), and the issues raised were not of public importance. 18 The
Court further distinguished D'Errico's claim, limited as it was to "the par-ticulars of his own excessive tax,"" from the broad based declaratory and
injunctive relief awarded in response to the substantial "public
considera-tions" presented by the taxpayers in Bettigole v. Assessors of
Spring-field. zo
Moreover, the Court did not permit D'Errico to realize retroactive relief. The Court, as an initial matter, considered the contempt action an inappro-priate vehicle for relief. The Court noted that chapter 231, sectionS was
de-that the abatement remedy was the taxpayer's best and only method of recovery, absent joinder as a named plaintiff in the Chomerics case. /d. at 1867, 424 N.E.2d at 514.
" 371 Mass. 289, 356 N.E.2d 460 (1976). In Sydney, the Court indicated that in tax cases, a litigant might be entitled to a declaration of the law even if he has failed to exhaust available administrative remedies. /d. at 293-95, 356 N.E.2d at 463-64. However, the Court made plain that "[u]nless the administrative remedy is 'seriously inadequate' under all the circumstances of the case, it should not be displaced by an action for a declaration. . . . " /d. at 294, 356 N.E.2d at 463. In addition, the Court reiterated its narrow and long-standing policy of notre-quiring exhaustion of administrative remedies only if "the case reduces to an issue of law without dispute as to the facts." /d. at 295, 356 N.E.2d at 464. See also S.V. Groves & Son, Co. v. State Tax Commission, 372 Mass. 140, 143, 360 N.E.2d 895, 898 (1977) (declaratory relief appropriate in a tax case which ''reduces to an issue of law without dispute as to the facts
..
").11 1981 Mass. Adv. Sh. at 1864-65, 424 N.E.2d at 512-13. 19 /d. at 1864, 424 N.E.2d at 513.
20 /d. See 343 Mass. 223,235, 198 N.E.2d 10, 17 (1961). In fact, theBettigole remedy, which enjoined the City of Springfield from collecting on its tax bills and required the City to issue an entire new set of bills, is. in disfavor. The remedy was labeled "extraordinary" in Leto v. Assessors of Wilmington, 348 Mass. 144, 148, 202 N.E.2d 922, 925 (1964), where the Court noted that "[t)o grant wholesale relief, rather than to remit the complaining taxpayers to less drastic remedies, may seriously affect a town's ability to conduct its public services and cause great fiscal confusion." /d. at 147, 202 N.E.2d at 924-25.
The Bettigole remedy has been rejected by subsequent courts and commentators. See, e.g., Tregor v. Assessors of Boston, 377 Mass. 602, 606, 387 N.E.2d 538, 541 (1979) (Bettigole remedy is extraordinary and. drastic relief which is narrowly confined); Coan v. Board of Assessors of Beverly, 349 Mass. 575, 578, 211 N.E.2d SO, 52 (1965) (Bettigole remedy only ap-propriate if such relief "will have not immediate effect on city fmances"); Boston v. Second Realty Corp., 9 Mass. App. Ct. 282, 283, 400 N.E.2d 876, 877 (1980) (similar); Note, The
438 1981 ANNUAL SURVEY OF MASSACHUSETIS LAW § 16.1
signed to assist a person ''who might subsequently become aggrieved by a
contemnor's failure to adhere to . . . [a] prospective command." 21
O'Er-rico was not entitled to relief under this statute because
Chomerics,
the caseupon which he based his claim, was not a class action, and retrospective
relief in that case was limited to its named plaintiffs. 22
D'Errico, in support of his fmal argument requesting retrospective relief, pointed to the characterization of the city'stax scheme as "wholly void" by
the judge in
Chomerics. D'Errico
reasoned that since a wholly void tax isvoid
ab initio,
23 he was entitled to recovery on the illegal tax. The Courtre-jected this argument, noting that the mere characterization of a tax as "wholly void," without more, would not "permit discretionary relief in
retrospect.'' 24 A wholly void tax has been defined as an unenforceable
nulli-ty - a tax levied on a person or propernulli-ty over which assessors lack
jurisdic-tion. 25 Although the judge in
Chomerics
termed the City's tax scheme aswholly void, it was, in reality, a scheme characterized by taxes based on an
erroneous assessment of the taxable property. 26 The taxes were not invalid
as to the subject property, person or purpose, and were therefore not wholly void.
A fmal case, which raised substantial questions of both liability and remedy, escaped resolution by the Court. The question of a court's jurisdic-tion to hear a case is fundamental to the litigajurisdic-tion process. This was made
plain in
Litton Business Systems, Inc.
v.Commissioner of Revenue,
27 whichbegan as "the first test of taxation by a city pursuant to the 'Classification Amendment,' " and ended by being dismissed for want of subject matter jurisdiction. 21
The
Litton
plaintiffs brought a substantial complaint in the superior court against the City of Fitchburg and the Commissioner of Revenue. Thejurisdictional basis for the action against the city29 was the ten-taxpayer
pro-vision of chapter 40, section S3. 30 That provision permits "ten-taxable
in-habitants" of a city or town to petition the Supreme Judicial Court or the superior court to determine the propriety of a prospective levy and, "before
21 1981 Mass. Adv. Sh. at 1865, 424 N.E.2d at 513. 22 Id.
23 See Harrington v. Glidden, 179 Mass. 486,491-92, 61 N.E.2d 54, 55 (1901), af/'dGlidden v. Harrington, 189 U.S. 255 (1903), where the Court characterized a wholly void tax as no assessment at all.
24 1981 Mass. Adv. Sh. at 1866, 424 N.E.2d at 513 .
., See note 23, supra.
26 179 Mass. at 492-93, 61 N.E.2d at 55. 27 1981 Mass. Adv. Sh. 1207, 420 N.E.2d 339. 21 /d. at 1210-11, 420 N.E.2d at 342 .
. " The plaintiffs sought a declaration against the Commissioner pursuant to G.L. c. 231A. •• G.L. c. 30, § 53 provides:
the final determination of the cause, restrain the unlawful exercise or abuse of such corporate power."
The plaintiff taxpayers alleged in their complaint that they were taxable inhabitants of the city. Initially, counsel for the defendants admitted this
point in their answers and in a statement of agreed facts. 31 Upon appellate
review, however, appellate counsel for the city moved for the first time to dismiss the action pursuant to Mass. R. Civ. P. 12(b)(l), alleging a lack of subject matter jurisdiction because the named plaintiffs did not include
ten-taxable inhabitants of the city. 32 The Commissioner of Revenue, at the same
time, asked to be relieved of her assent to the statement of agreed facts as improvident. 33
In fact, several of the Litton plaintiffs were corporate taxpayers. The
court re-affirmed earlier holdings that "inhabitants" are natural persons, and not corporations, and that an "inhabitant" of a city must be domiciled
in the city. 34 The Court elected not to· allow the plaintiffs to amend their
complaint to include additional natural persons. 35 This decision was based
upon the Court's agreement with the Commissioner's view that the factual record was inadequate to support a decision touching upon vital statutory and constitutional issues. Instead, the case was remanded to the superior court, where it was dismissed.upon the plaintiffs' failure to demonstrate the
presence of ten natural persons among their numbers. 36
The adoption by Massachusetts voters of the revenue limitation measure
officers or agents are about to raise or expend money or incur obligations purporting to bind said town, regional school district, or district for any purpose or object or in any manner other than that for and in which such town, regional school district, or district has the legal and constitutional right and power to raise or expend money or incur obli-gations, the supreme judicial or superior court may, upon petition of not less than ten-taxable inhabitants of the town, or not less than ten-ten-taxable inhabitants of any town in the regional school district, or not less than ten-taxable inhabitants of that portion of a town which is in the district, determine the same in equity, and may, before the final determination of the cause, restrain the unlawful exercise or abuse of such corporate power.
" 1981 Mass. Adv. Sh. at 1211, 420 N.E.2d at 343.
" /d.
" /d. at 1211-12, 420 N.E.2d at 343.
•• /d. at 1210, 420 N.E.2d at 341-42.
" /d. at 1211, 420 N.E.2d at 342.
440 1981 ANNUAL SURVEY OF MASSACHUSETIS LAW § 16.2
commonly referred to as Proposition 2~37 is certain to have a profound
ef-fect on the nature of real property litigation in the future. Since 1961 and the
Bettigole
decision, the Supreme Judicial Court made plain its will-ingness to play an active role in ensuring municipal compliance with stateconstitutional and statutory assessment requirements. The 1975 Sudbury
case and the 1979
Andover
decision31 expanded the role and clarified theauthority of the Commissioner of Revenue in the enforcement of the law.
At the time of the Survey year, there was little in the way of new law that
was left to be made in the area. The emphasis, as
French, D'Errico
andLit-ton
make plain, was on remedy and a tying up of loose ends left in theafter-math of prior decisions.
Proposition 2~. which limits the amount of money a community can
raise in a tax year to a fixed percentage of the community's fair cash value,
will encourage compliance with the obligation of municipalities to assess at
full value. The operation of levy limitation provisions of Proposition 2~
encourages all cities and towns to keep assessments at full value across the board. It makes fiscal sense for a municipality to raise a rlXed percentage of
1000fo of full value, rather than a rlXed percentage of some substantially lower figure. The real challenge to communities will no longer be the expeditious implementation of revaluation programs but the year to year maintenance of "full value" values for the purpose of calculating annual levy limitations.
§ 16.2. Proposition l¥2 - Introduction - Decisional Law.
Proposi-tion 2 ~, the tax limitation provision enacted into law through the Initiative
process in November, 1980,1 was the most far-reaching matter affecting
state and local taxation in the 1981 Survey year. The enactment was Wide
ranging and, in the realm of state and local taxation, provided (1) for limits on the amount of money a community can raise in a fiscal year (having the effect of lowering the tax rate), 2 and (2) for a "renter's deduction" of
fifty-percent of one's rent in a tax year.3 Proposition 2~ also had the perhaps
unintended affect of accelerating the movement of local officials to revalue
real property so that it is assessed at 1000fo of full and fair cash value- a
long held, long unattainable, state constitutional goal. 4
In order to appreciate fully the dimensions of the municipal tax and
expenditure limitations enacted into law in 1981, it is essential to have a
" St. 1980, c. S80.
,. Commonwealth v. Town of Andover, 378 Mass. 370, 391 N.E.2d 122S (1979). § 16.2. 1 On November 4, 1980, the voters approved Proposition 2~ by a vote of 1,438,768 to 998,839.
• See St. 1980, c. S80, § 1. ' See St. 1980, c. S80, § 11.
basic understanding of the recent history of judicial, legislative and admin-istrative efforts to establish statewide conformity with the state constitu-tional requirements. It is equally appropriate, considering Massachusetts' reliance on the property tax for revenue production, to focus attention on particular events relating to the taxation of real property. Only recently in Massachusetts' history, for example, have the courts and the legislature made special efforts to enforce the state constitutional requirement that all real property in the Commonwealth be valued in a manner consistent with state constitutional requirements.'
The legislative response to the historic failure of cities and towns to com-ply with the law was twofold. First, the General Court established a statuto-ry framework that would require and encourage local assessors to conform local assessments to the constitutional requirement of proportionality in chapter 58.6 The most important provision appears in chapter 59, section
38, which provides that taxes must be assessed against the "fair cash value" of real property, a requirement which has been in continuous existence since 1853.7
Second, the legislature sought to reform the property tax system alto-gether, in response to both the increasing tax burden • and accelerated judicial enforcement of the fair cash value requirement against local assessors. In the last decade, particular attention focused on amending the
' See Coomey v. Board of Assessors of Sandwich, 367 Mass. 836, 837, 329 N .E.2d 117, 119 (1975), and cases cited therein. The Massachusetts Constitution has, since its adoption in 1780,
mandated that the legislature, in the exercise of its power to tax, impose "proportional and reasonable assessments, rates and taxes, upon all the inhabitants of . . . the said Common-wealth." MAss. CoNST. Part 2, c. 1, § 1, art. 4. See also Declaration of Rights, Art. 10 (each in-dividual is obliged to contribute "his share" of the expenses of government).
The principle of proportionality was imported into the Constitution from the Province Charter of 1691. Opinion of the Justices, 324 Mass. 724, 728, 85 N.E.2d 222, 225 (1949). A
concise history of the property tax in Massachusetts is set forth in the FIRST REPORT OF THE SPECIAL CoMMISSION TO DEVELOP A MAsTER TAX PLAN RELATIVE TO CONSTITUTIONAL LIMITS ON THE TAX POWER, 1969 Mass. Sen. Doc. No. 126 (Sept. 1969) [hereinafter cited as FIRST REPORT), at 12-44 and in Legislative Research Council, CLAsSIFICATION AND AssESSMENT OF
REAL PROPERTY, 1969 Mass. House Doc. No. 532 (May 21, 1969), at 21-30.
• For a discussion of the statutory framework see Town of Sudbury v. Commissioner of Corporations & Taxation, 366 Mass. 558, 563-67, 321 N.E.2d 641, 646-47 (1974); see also
Tregor v. Board of Assessors of Boston, 377 Mass. 602,604, 387 N.E.2d 538, 540cert. denielJ,,
444 U.S. 841 (1979) (the Commonwealth's statutes require assessors to assess property at its 'fair cash valuation').
7 See St. 1853, c. 319, § 1.
• Massachusetts per capita property tax levies increased from $69.33 in 1949 to $221.84 in
1968. Measured in constant 1957-59 dollars, the per capita tax more than doubled during this
442 1981 ANNUAL SURVEY OF MASSACHUSETTS LAW § 16.2
state Constitution in order to apportion the burdens more fairly among the
Commonwealth's taxpayers. Efforts to amend the state constitution to authorize different tax treatment of separate classes of property began shortly after the Supreme Judicial Court's decision in Bettigole v. Assessors
of Springfield.' Proposals were defeated by the legislature, sitting in joint
sessions, in 1961, 1962, 1963, and 1967!0 A proposal for a Constitutional
amendment similar in most respects to the one subsequently ratified by the voters in 1978 was placed on the state ballot for ratification in the general election of November 3, 1970, and was defeated.
The landmark Sudbury decision, in December, 1974,11 gave new impetus
to the classification movement. Five months after the Sudbury decision the General Court, in joint session, approved a proposed amendment by a vote of 220 to 53. In a second joint session on September 7, 1977, the legislature again approved the proposal by a 243 to 20 vote. The proposed amendment appeared on the November 7, 1978 state ballot as Question #1. After a hotly
contested election, 12 the voters ratified the amendment by a vote of
1,285,865 to 649,400. The legislature has twice attempted to implement the
Classification Amendment; 13 each attempt worked a complete
transforma-tion on the Massachusetts property taX system.
The legislature's first response to the Classification Amendment, chapter 580, section 38 of the Acts of 1978, was a decisive statement in support of
favorable tax treatment for residential property .14 This initial act was
short-lived, however, and was never implemented in any city or town. The next act, statute 1979, chapter 797, codified what, with minor changes, now stands as the system of property classification in Massachusetts .• , Under the current system, municipalities have the ability to determine, within certain
fixed limits, the respective tax burdens of the four classes of real property.16
• 343 Mass. 223, 178 N.E.2d 10 (1961). The Master Tax Commission observed that the clas-sification amendment presented to the voters in 1970 was "put forward in response to recent court decisions which have ordered local assessors to assess at 100"7o of fair cash value. . . . " FIRST REPORT, supra note 5, at 44, 14. The proposed amendment would "empower the General Court to legitimize existing assessment practices" which resulted from the existing "impossibil-ity of legislative differentiation" among different classes of property. Id.
•• Id.
" 366 Mass. 558, 321 N.E.2d 641 (1974).
" See Opinion of the Justices, 378 Mass. 802, 804, 393 N .E.2d 306, 307-08 (1979); Anderson v. City of Boston, 376 Mass. 178, 380 N.E.2d 628 (1978).
" St. 1978, c. 580 and St. 1979, c. 797.
•• See Associated Industries of Massachusetts v. Commissioner of Revenue, 378 Mass. 657, 393 N.E.2d 812 (1979). See also St. 1978, c. 580, § 38 (former G.L. c. 59A, §§ 5, 17, 18).
" For a short, concise description of current property classification law, see Hines, 1979
Classification Legislation, 24 BoSTON BAR J. (1980).
com-Classification did not eliminate the constitutional obligation to value property uniformly and at full value. That remains a "foundational
re-quirement " - a prerequisite to classification! 7 The Commissioner thus
embarked on a vigorous program designed to assist each of the state's 3S1 cities and towns achieve compliance with the constitutional goal by fiscal
year 1983.11 The Commissioner made use of her ample authorityu to
re-quire assessors to submit and adhere to approved plans for expeditious
revaluation programs. zo
The enactment of Proposition 2Vz had the unintended but unmistakable
effect of encouraging cities and towns to revalue real property as promptly
as possible. 21 In 1981, with a statewide push to revalue on the part of many
communities, it became apparent that delays in revaluation programs, and the Commonwealth's certification program, would not enable certain
com-munities to issue fiscal 1982 tax bills based on new (i.e., revalued, hence
higher) property values. Accordingly, the legislature enacted chapter 4S4 of
the Acts of 1981 as an emergency measure. zz Chapter 4S4 authorized cities
and towns which would have completed and implemented revaluation pro-grams prior to February 1, 1982, to require the payment of an estimated tax
in lieu of the issuance of a tax bill for the usual fall tax payment. 23
Permitting cities and towns with nearly complete revaluation programs to issue estimated tax bills enabled them to delay issuing a regular tax bill until the spring, thus avoiding a serious cash flow problem which would require
mercial (class three), and industrial (class four). G.L. c. 59, § 2A(b). The Commissioner, for purposes of her valuation studies, divides the residential class into numerous sub-classes: R-1 (single family dwelling); R2 (two family); R3 (three family); R4 (four family); CD (condo-miniums).
" Opinion of the Justices, 378 Mass. 802, 805, 393 N.E.2d 306, 308 (1979).
" See Keniston v. Board of Assessors of Boston, 1980 Mass. Adv. Sh. 1485, 1487 n.4, 407 N.E.2d 1275, 1277 n.4.
19 In the years since the Sudbury decision, the statutory responsibilities of the Commissioner and her authority within the statutory scheme have grown. See, e.g., G.L. c. 58, §§ 1 and 3 (Commissioner may issue regulations and guidelines providing for the assessment and classifi-cation of property); G.L. c. 58, § 1A, R. 1; G.L. c. 58, §§ 1A, 13, 4 (The Commissioner may "direct" or "require of [assessors] such action as will tend to produce uniformity throughout the Commonwealth in valuation, classification and assessments."). This latter authority in-cludes the power to enter a contract, on behalf of a city or town, for the reappraisal of its real property and to cause the Treasurer to deduct the cost of the contract from the community's annual state aid distribution. See G.L. c. 58, § 4A.
20 See Commonwealth v. Town of Andover, 378 Mass. 370, 391 N.E.2d 1225 (1979). 21 The explanation for this phenomenon is obvious: it is in the interest of a community seek-ing to maximize its revenue raisseek-ing ability to have the ability to raise up to 2 Vz percent of values assessed at full (i.e., lOOOJo) value.
22 As an emergency measure, the enactment took effect immediately upon signing by the Governor .
444 1981 ANNUAL SURVEY OF MASSACHUSE'ITS LAW § 16.2
costly short term, high interest borrowing. 24 The enactment required
estimated bills to be no greater than 500Jo of the net tax payable for fiscal
1981. It further required all cities and towns issuing such bills to set a final
fiscal1982 tax rate on or before April1, 1982. The estimated tax previously paid would be credited against the tax set by the final rate, and the balance
due would be payable by May 1, 1982.2'
Proposition 2112 was one of two laws proposed by initiative petition on the November 4, 1980 ballot designed to limit taxation in the
Common-wealth. 26 The Act includes a number of provisions which either directly
reduce taxes or control upwardly spiralling government costs. In the former
category belong the reduction in automobile excise taxes, 27 the renter's
in-come tax deduction, 21 and the limitation on local levies. 29 In the latter
cate-gory belong the provisions limiting fiscal autonomy for school committees, 30
eliminating binding arbitration for police and firemen31 and provisions
re-quiring local acceptance of certain state-mandated costs. 32
Two aspects of Proposition 2112 stand out for particular scrutiny in this
chapter. The first is the limitation on local tax levies. 33 Chapter 59, section
21 C, inserted into the statutory scheme by chapter 580, section 1 of the Acts of 1980, restricted the amount of taxes a municipality may raise in a tax year to 2112 percent of its full and fair cash value. Each city and town must either exist at, or roll back to, levies which are 2112 percent of its full and fair cash value. To the degree to which a community's levy limit exceeds 2Yl percent of full value, it is required to roll back its levy by a maximum of 150Jo each ' year, until it reaches the statutory requirement. A small number of com-munities which, in fiscal1979, had levies less than 2Yl percent of their full
and fair cash value were required to freeze their levies at that lower level. 34
An additional levy limitation imposed by Proposition 2112 allows
com-munities to raise their annual levies by a maximum of 2112 percent each fiscal year. Thus, chapter 58, section 21C(4) permanently limits annual
•• See Department of Revenue Property Tax Bureau Informational Guideline No. 81-238 .
.. /d.
" Another tax cutting measure, appearing as question 113 on the 1980 ballot, was sponsored by the Massachusetts Teachers Association, and was defeated by a vote of 816,80S (yes) to 1,473,309 (no).
27 St. 1980, c. S80, § 9. 21 St. 1980, c. S80, § 11.
., St. 1980, c. S80, § 1.
•• St. 1980, c. S80, § 7.
II St. 1980, c. S80, §
s.
12 St. 1980, c. S80, § 2.
u A 1979 "tax cap" enactment foretold of tax limitations to come. A two year "tax cap" provision, in part, limited the amount of money a community could spend to a sum not greater than 104'1t of the prior year's levy. Proposition 214 went a substantial step further than the
.. tax cap" law.
property tax increases by restricting a community's levy to 2
Vz
percent of its prior year's levy, without regard to any increased growth in its full and fair cash valuation.The legislature made some significant changes to the original version of
the act in chapter 782 of the Acts of 1981.35 Two modifications stand out
for special attention. The first allowed cities and towns, upon the vote of
the people, to exclude debt service from the act's levy limitations. 36 The
sec-ond altered, and made easier, the ability of a city or town to override the
strict
2Vz
percent limitations imposed by the original act. 37The experience of prior tax cutting measures across the nation, most
notably California's Proposition 13,31 apparently convinced the drafters of
Proposition
2Vz
that only an explicit statutory benefit for those who renttheir living space would ensure that all citizens would participate in the tax
relief. Thus, the second major provision of Proposition
2Vz
was theso-called renter's deduction. Statute 1980, chapter 580, section 11 provides for a state income tax deduction of an amount equal to fifty percent of an
indi-vidual's rent in a tax year. 39 Regulations promulgated by the Commissioner
of Revenue make the deduction available to state residents for their
prin-cipal place of residence. 40
Two decisions of the Supreme Judicial Court during the Survey year
con-cerned themselves directly with the provisions of Proposition
2Vz.
Thecon-stitutionality of the enactment was at issue in a comprehensive challenge
brought by several labor unions in
Massachusetts Teachers Association
v.Secretary of the Commonwealth.
41 The challenge to Proposition2Vz
focused primarily upon alleged procedural irregularities in its adoption and the purported unconstitutionality of the renter's deduction. In an
.exhaus-tive opinion, the Court upheid the enactment in its entirety. 42
" For a detailed description of the modifications made by St. 1981, c. 782, see Department of Revenue Property Tax Bureau Informational Guideline No. 82-210.
" St. 1981, c. 782, § 10. 37 /d.
" See generally Amador Valley Joint Union High School District v. State Board of Equali-zation, 149 Cal. Rptr. 239 (1978). It is plain that Proposition 2\ll traces its origins to the land-mark California tax cutting measure. See Legislative Research Bureau, REPoRT RELATIVE TO Two TAX AND SPENDING LIMITATION PROPOSALS ON THE 1980 MAssACHUSETTS STATE ELEC· TION BALLOT (August 4, 1980) at 19-20, 27, 30 and 233.
" The Legislature modified the provisions of the renter's deduction on two occasions in 1981. St. 1981, c. 782, §§ 12 and 13limited the calendar year 1981 deduction for each renter to two thousand five hundred dollars. St. 1981, c. 795, § 17, removed that dollar limitation for future years and rewrote the statute in plainer terms. G.L. c. 62, § 3(9) thus entitled a renter to a deduction "in the case of an individual who rents his principal place of residence in the Com-monwealth, an amount equal to fifty percent of such rent."
•• See 830 CMR 62.40.
446 1981 ANNUAL SURVEY OF MASSACHUSETIS LAW § 16.2
The only portion ofthe Court's opinion which deals with matters relating to state taxation is the section on the constitutionality of the renter's deduc-tion. 43 The plaintiffs raised two related challenges to the deduction: first,
that it violated the equal protection guarantees of the federal and state con-stitutions and, second, that it violated state constitutional requirements of uniformity and proportionality. 44
The Court quickly dispensed with the equal protection challenge, noting that the "State's scope of discretion is especially wide in the field of taxa-tion. "45 Because property owners realize significant federal tax advantages
in which renters may not participate, and because they would be receiving unique state tax advantages due to Proposition 2 Vz, the Court found it quite
reasonable for the' enactment to afford residential tenants favored income tax treatment. 46
The Court had more difficulty with the article 44 challenge. The Court reiterated prior rulings that article 44 mandates proportionality of taxation of income by requiring a uniform rate throughout the Commonwealth. 47
Special state income tax treatment for renters, the plaintiffs argued, vitiated this proportionality requirement. The Court rejected this argument, liken-ing the deduction to a tax exemption. 41 The reasonableness of the deduction
was determined by a review of the benefits enjoyed by homeowners in which renters could not participate. Chief among those benefits was the home-owner's essentially tax free equity in the home as an asset. A renter who might seek to invest money in another manner (say, the ownership of stock) is taxed on his investment. A homeowner is not taxed on his investment as an investment. Taking all of the homeowner's tax advantages together as a whole, the Court determined that "the allowance of a deduction of one-half of the rent paid annually by a residential tenant appears reasonable in rela-tion to the benefit of a homeowner receives from the tax free use of his home."4 '
The Court considered more substantive aspects of Proposition 2Vl in
Newton
v.Commissioner of Revenue.
5°
The determination of acommun-., ld. at 1793, 424 N.E.2d at 486. The vast majority of the decision concerns questions relating to the initiative process.
•• ld. at 179S-96, 424 N.E.2d at 487-88. See MAss. CoNST. amend. art. 44. •• ld, at 179S, 424 N.E.2d at 487.
•• /d. See generally Kee &Moon, The Property Tax and Tenant Equality, 89 HARv. L. REv. S31, S33 (1976).
41 Id. at 1796, 424 N.E.2d at 488. See, e.g., Opinion of the Justices, 3S4 Mass. 792, 794, 236
N.E.2d 882, 884 (1968).
•• 1981 Mass. Adv. Sh. at 1800, 424 N.E.2d at 490. Article 44 contemplates reasonable ex-emptions from taxation. See Daley v. State Tax Commission, 376 Mass. 861, 86S-66, 383 N.E.2d 1140, 1143 (1978).
•• 1981 Mass. Adv. Sh. at 1800, 424 N.E.2d at 490.
ity's full and fair cash valuation for purposes of Proposition 2~ becomes
"crucial because the taxes raised under the initial determination will be a
benchmark for calculating the amount by which a locality can increase taxes in future years."" The Commissioner of Revenue issued a directive 52 on
February 24, 1981, to guide local assessors in the determination of full value. For those communities which had recently undergone a complete, ap-proved property revaluation program, the Commissioner allowed local
offi-cials to use the actual value. 53 For those communities in the process of
prop-erty revaluations, the Commissioner determined that "it seems reasonable to substitute for assessed value the 1980 Equalized Valuation, increased by the uniform factor of thirteen percent. . . . "5• This provision was chal-lenged by the City of Newton, and the resulting Court decision provided a unique construct for judicial analysis and an important redefinition of the authority of the state Commissioner of Revenue.
Newton, a community which would not complete its revaluation program
until fiscal 1981 , 55 sought to maximize its revenue-sharing ability by
estab-lishing a larger full and fair cash value than the figure which resulted from the Commissioner's formula. To do this, Newton performed its own analy-sis of value in the city and sought the Commissioner's approval of its alter-native methodology. At stake was nearly twelve million dollars." The Com-missioner refused to review Newton's analysis and required the City to com-ply with her directive. Newton's court challenge disputed the Commission-er's authority, and the reasonableness of her methodology.
The Court determined both issues in favor of the Commissioner. First, it established that the Commissioner had authority ''to issue guidelines imple-menting a Statewide property tax scheme" requiring a measure of uniform-ity." Next, the Court approved the Commissioner's attempt to impose a uniform methodology on communities like Newton. The Court held that the Commissioner, while implementing a law like Proposition 2 V2, need not fashion a formula which "achieve[s] perfection in result" if she can
"fashion a normative standard based upon reliable data. "58 Significantly
in times when the state property tax scheme is undergoing periodic changes
" /d. at 1660, 423 N.E.2d at 1013.
" The Commissioner issued Technical Information Release 81-401, entitled "Guidelines for Adjustment of Preliminary Full and Fair Cash Value," on February 24, 1981.
" 1981 Mass. Adv. Sh. at 1662, 423 N.E.2d at 1014.
•• /d. The 130J'o inflation factor was based upon an analysis of statewide real estate market trends, which the Court apparently found persuasive evidence of the reasonableness of the Commissioner's decision./d. at 1661, n.5, 423 N.E.2d at 1014 n.5.
" /d. at 1661, n.3, 423 N.E.2d at 1814 n.3.
" /d. at 1664, 423 N.E.2d at 1015.
" /d.
448 1981 ANNUAL SURVEY OF MASSACHUSETTS LAW § 16.3
of a substantial nature, the Court held the Commissioner to an eminently workable standard: "a judgment conceding perfection in result, in favor of a process which is orderly, expeditious, and reliable . . . is [one] that is neither arbitrary nor capricious.''"
§ 16.3. Personal Income Taxes - Graduated Tax. In an Opinion of
the Justices
1 to questions asked by the House of Representatives, the Courtrejected a legislative proposal which would have established a de facto
graduated income tax system. House Bill6418 (1981) would have repealed
chapter 62 of the General Laws, and added a new chapter 62E. 2 The pro7
posed new statute would have enabled a taxpayer to compute his state in-come tax by applying a flat percentage rate to his federal inin-come tax liabil-ity.' Because the federal income tax system taxes income at graduated rates,• the effect of the legislative proposal would have been to establish a graduated state income tax.'
The Court reiterated its long held view that article 44 of the amendments
to the State Constitution' forbids the taxation of income from the same
class of property at graduated rates. 7 A state income tax which would be
" /d. at 1666, 423 N.E.2d at 1016.
§ 16.3. • 1981 Mass. Adv. Sh. 1433, 423 N.E.2d 7SI. 2 /d. at 1433, 423 N.E.2d at 7S2.
' /d. The proposal would have imposed a tax on Massachusetts income "earned or received each taxable year by all individuals, estates, or trusts equal to 30% of that taxpayer's Federal income tax liability, 'reduced by a percentage equal to the percentage of the taxpayer's gross income for the taxable year which is not Massachusetts income.' " /d.
• See 26 U.S.C. §§ 1, 3 (Supp. 1979).
' 1981 Mass. Adv. Sh. at 1434, 423 N.E.2d at 7S2. The two questions posed by the legisla-ture were:
I. "Would the enactment of House Bill No. 6418 constitute a permissible delegation of authority by the General Court in that it would base the determination of an individual's personal income tax liability to the Commonwealth upon federal law?" 2. "Is it constitutionally competent for the General Court to enact House Bill No. 6418 which would provide for the computation of an individual's state income tax liability through the utilization of a single rate applied to an individual's federal income tax lia-bility under the provisions of Article 4 of Part Two Chapter 1 Section one and Article 44 of the amendments to the Constitution of the Commonwealth of Massachusetts[?]"
• MAss. CoNST. amend. art. 44 provides that:
Full power and authority are hereby given and granted to the general court to impose
and levy a tax on income in the manner hereinafter provided. Such tax may be at differ-ent rates upon income derived from differdiffer-ent classes or property, but shall be levied at a uniform rate throughout the commonwealth upon incomes derived from property, and may arant reasonable exemptions and abatements. Any class of property the income from which is taxed under the provisions of this article may be exempted from the im-position and levying of proportional and reasonable assessments, rates and taxes as at present authorized by the constitution. This article shall not be construed to limit the power of the general court to impose and levy reasonable duties and excises.
'ld. at 143S, 423 N.E.2d at 7Sl. In Opinion of the Justices, 266 Mass. S83, 16S N.E. 900
based on a flat percentage of the federal rate would, because of the gradu-ated nature of the federal system, "work out to a tax that had, in effect, graduated rates.• Noting that the uniformity requirement to article 44 is more than merely "nominal,"' the Court intimated that it would reject any future attempts to circumvent that requirement through ingenious modes of computation, or provisions for exemptions or deductions which "may have effects comparable to effects of graduated rates." 10
Thus the Court rejected the proposed legislation's attempt to keep a uniform tax rate while graduating the taxable base. It is the substance, not the form of legislation to which the Court looks for guidance in determining whether the article 44 requirement of uniform rates is met. The Court's rather rigid position in this regard was justified, in part, by a reference to the will of the people, plainly articulated at the voting booth in 1915 and in subsequent efforts to amend article 44, that Massachusetts impose income taxes at a uniform, non-graduated rate. Implementation of devices such as exemptions or linkage with the graduated federal system in an effort to achieve a graduated income tax result without a graduated rate would not be tolerated.11
§ 16.4. Property Taxation - Manufacturing Exemptions. Two deci-sions provided elucidation of the meaning of "manufacturing" for purpos-es of qualifying for the exemptions provided by chapter 63, sections 38C1
and 42B, z and chapter S9, section S, sixteenth. 3
rates only with respect to reasonable classifications of property as to sources of income . . . [b]ut nothing in [article 44] authorizes the classification of the owners of property or of tax-payers for the same purpose. . . . If it had been intended that there might be differences in rates based upon differences in amounts of income received by the taxpayers, as well as upon differences in sources of income received by the taxpayers, it would have been simple to express that purpose in art. 44 . . . . " Id. at S8S-88, 16S N.E. at 901-03.
• /d. at 1437, 423 N.E.2d at 7S4.
• /d. Plainly, the Court's concern was with the substance and not merely the form of the in-come tax proposal.
10 /d.
" But see Opinion of the Justices, 386 Mass. 1223 (1982) (sharply divided court permits reasonable exemptions which may have the effect of a graduated income tax).
§ 16.4. ' O.L. c. 63, § 38C and O.L. c. S8, § S, sixteenth provide an exception for domestic manufacturing corporations.
' O.L. c. 63, § 42B, provides in part that a foreign manufacturing corporation "shall be
taxed in the same manner and shall have the same duties under this chapter and chapter sixty-two C as other foreign corporation, except insofar as the determination of the excise under this
chapter may be affected by reason of the exemption from local taxation of the machinery of a foreign manufacturing corporation."
4SO
1981 ANNUAL SURVEY OF MASSACHUSEITS LAW § 16.4Southeastern Sand and Gravel, Inc.
v.Commissioner of Revenue
4pre-sented the Court with a straight-forward question: whether a taxpayer, whose business consisted of excavating, loading and hauling gravel to a plant where it is crushed into small pieces, was engaged in manufacturing within the meaning of chapter 63, section 38C. The Court agreed with the Appellate Tax Board that such a process was not manufacturing.' The term manufacturing was defmed as
a process of change effectuated by the use of forces directed by a human mind, resulting in the transformation of some preexisting substance into something different, carrying a different name and nature and adapted to a new use.' The Court ruled that a taxpayer is entitled to an exemption only when the property or activity falls "cleanly and unmistakably" within the express
words of the appropriate legislative provision. 7 Crushing gravel into small
pieces did not satisfy that definition. •
More complex and timely questions arose in
Westinghouse Broadcasting
Co., Inc.
v.Commissioner of Revenue.'
The taxpayer, owner and operator of a Boston radio and television station, sought classification as a manufac-turing corporation for state taxation purposes based on the technique item-ployed to transmit television and radio signals.10 If so classified, the
Com-pany would have benefitted from a statutory exemption of its machinery, which had an estimated value of $1.3 million.•• The State Tax Commission
shall not be deemed to include stock in trade or any personal property directly used in connection with dry cleaning or laundering processes or in the refrigeration of goods or in the air-conditioning of premises or in any purchasing, selling, accounting or admin-istrative function.
• 1981 Mass. Adv. Sh. 2435, 429 N.E.2d 714.
' /d. at 2435,429 N.E.2d at 715. Substantial amounts of litigation have arisen over the years regarding the characterization of various enterprises as "manufacturing" for taxation purpos-es. The Court in Southeastern Sand and Gravel, recognized the "chameleon-like" nature of the term in the absence of any statutory definition. Id. at 2436, 429 N.E.2d at 716. Justice
Ronan, speaking for the Court in Commissioner of Corporations and Taxation v. Assessors of Boston, 324 Mass. 32, 84 N.E.2d 531 (1949), noted that "[t)he varying meanings to be at-tributed to the word 'manufacturing' are to a large extent determined by the object sought to
be effected by the enactment in which it appears." /d. at 37, 84 N.E.2d at 534. Compare Rowe Contracting Co. v. State Tax Commission, 36-1 Mass. 158, 279 N.E.2d 675 (1972) (production of gravel and treated stone is manufacturing for sales tax purposes) with Wellington v. Bel-mont, 164 Mass. 142, 143, 41 N.E.2d 62, 62 (1895) (quarrying and crushing stone is not manu-facturing).
The burden of persuasion which an aggrieved taxpayer must meet - i.e., a demonstration that the Appellate Tax Board's definition of the term "manufacturing" was erroneous as a matter of law, 1981 Mass. Adv. Sh. at 2436, 429 N.E.2d at 716- is substantial.
• 1981 Mass. Adv. Sh. at 2436, 429 N.E.2d at 716. 7 Id. at 2437, 429 N.E.2d at 716.
I /d,
' 1981 Mass. Adv. Sh. 183, 416 N.E.2d 191.
•• /d. at 183, 416 N.E.2d at 191.
denied the company's application for this favored classification, and the Appellate Tax Board affirmed the Commission's finding. u The Company
appealed to the Supreme Judicial Court.
The Court, in deciding whether the Company's operations qualified for the classification and resultant tax exemption, noted the alleged manufac-turing activities of the Company. In describing its activities and "manufac-turing process,'' the company explained how, in television and radio broad-casting, acoustical and visual energy and information is changed into an electrical signal, which through the application of complex technology, is transmitted to distant receivers.13 The Court concluded that, based upon
this description, the decision of the Appellate Tax Board could not be held wrong as a matter of law. 14
At the outset of its analysis, the Court defined "manufacture" as the process of transforming raw or finished materials into an essentially new or different item." The Court observed -that the definition of manufacture would have to be significantly distorted to be able to include broadcasting activity, and termed the Company's activity more appropriately as "a trans-mission of intelligence." 16
The Court likened such broadcasting to cases involving computer time sharing and telephonic trasnformation processes where similar applications had been similarly rejected. 17 The taxpayer's constitutional challenge,
seek-ing treatment on an equal footseek-ing with local newspaper publishers (which were classified as manufacturing corporations), 11 was rejected by the Court
on the basis that such line-drawing was a necessary incident of an elusive concept like "manufacture."19 The Court noted that "[t]ax statutes
customarily make narrow distinctions without running into [constitutional] trouble." 20
" /d. at 184, 416 N.E.2d at 191.
" /d. at 186,416 N.E.2d at 193. According to the taxpayer, television broadcasting consist-ed of changing optical information "into an electrical signal which is modificonsist-ed in many ways by the application of extremely complex technology, encoded and placed on the broadcaster's carrier and sent out to be received by a reviewing set at a great distance." /d. The company
characterized radio broadcasting as the transformation of acous.tical energy "into an electronic signal . . . beamed through the broadcaster's carrier to receiving stations." /d .
.. /d. " /d.
" /d. at 187, 416 N.E.2d at 193. 17 /d.
" /d. at 188, 416 N.E.2d at 194. The equal protection claim raised by the taxpayer alleged unconstitutionally disparate treatment of various arms of the media. The exemption of two newspaper publishing corporations as manufacturing corporations was challenged as particu-larly invidious since those corporations are engaged in "First Amendment activities." /d. The
Court was unpersuaded and rejected any nexus between the First Amendment nature of the broadcasting business and the propriety of state taxation of such an enterprise. ld.
" /d.
452 1981 ANNUAL SURVEY OF MASSACHUSEITS LAW § 16.5
The decision relied on the legislative history of chapter 59, section 5,
six-teenth, noting the original legislative intent to save factories in the
post-Depression era. 21 Broadcasting was deemed "outside this matrix of
inten-tion and expectainten-tion." 21 The Court nonetheless made plain that it was less
than comfortable with its decision, noting that
the criteria of manufacture, as defmed in the light of its historical provenance, may not serve the needs of the year 1981. But redefmition is for the legislature.23
Future
Survey
years may provide clarity to this particular area of tax law.§ 16.5. Corporate Income Tax - Rental Income. Massachusetts taxes
as income the rent derived from the ownership of real estate. 1 The taxpayer
in
Smith
v.Commissioner of Revenue,
2 was a Massachusetts trust which had been assessed a state income tax on its net rental income from real estate which was also subject to local taxation. The taxpayer reasoned that the taxation of its net rental income violated both article 44 of the amend-ments to the State Constitution, and the equal protection clause of the Stateand Federal Constitution. 3 Both arguments were rejected.
First, the Court noted that chapter 62, section 2(a), as rewritten in 1971,4
evinces an explicit legislative intent to subject rental income derived from real estate to the state income tax.' The Court reasoned that this construc-tion was not inconsistent with article 44, which "grants complete authority to tax the full range of incomes."'
An equal protection claim raised by the taxpayer was also quickly dis-missed. The claim was a straightforward allegation that chapter 59, section
5, twenty-seventh, by exempting all income-producing property, other than
real property, from local taxation if that property is or would be subject to
state income taxation, created an impermissible classification. 7 The Court
21 /d. at 187, 416 N.E.2d at 193 . .. /d.
•• Id. at 189, 416 N.E.2d at 194.
§ 16.5. • See generally O.L. c. 62, §§ 1 et seq. In 1971, the legislature enacted comprehen-sive changes in O.L. c. 62. St. 1971, c. 555, §§ 1 et seq. The Court has commented that the 1971 act "completely rewrote the Income Tax Law, and in many respects completely revised the basic nature of the tax." Ingraham v. State Tax Commission, 368 Mass. 242, 244-45, 331 N.E.2d 795, 796 (1975) (quoting Burnes v. State Tax Commission, 363 Mass. 589, 592-93, 296 N.E.2d 510, 512 (1973)). Among the changes affected by the legislature was the establishment of state income tax liability for business trusts engaged in any business activity or transaction for fmancial profit in Massachusetts.
2 1981 Mass. Adv. Sh. 677, 417 N.E.2d 967.
• Id. at 677-78, 417 N.E.2d at 968.
• The state's income tax laws were substantially rewritten in 1971. See St. 1971, c. 555. ' 1981 Mass. Adv. Sh. at 678, 417 N.E.2d at 678.
' /d. (quoting Ingraham v. State Tax Commission, 368 Mass. 242,246, 331 N.E.2d 795,797 (1975)).
§ 16.6 STATE AND LOCAL TAXATION 453
dealt with this equal protection claim summarily, reiterating the long estab-lished standard of review: ''Any distinction in a tax statute that has a ra-tional basis will survive a challenge under the equal protection clause. The breadth of legislative discretion available to the Legislature is wide in tax
classifications." 8 The taxpayer was unable to meet his substantial burden of
persuasion. The Court rejected its constitutional claim, holding that the distinction between income-producing real property and other income-pro-ducing property was rational because real property generally realizes greater
benefits in the form of local services than other forms of property. 9
§ 16.6. Corporate Excise Tax - Relation to Federal Law. The income
component of the corporate excise came under scrutiny in Parker Affiliated
Co., Inc. v. Department of Revenue,' where the corporate taxpayer, in the computation of its state tax liability, sought to apply certain federal tax
pro-visions while disregarding others. 2
In 1973, the tax year in question, the taxpayer sold its entire interest in a subsidiary and, for federal tax purposes, realized a net long-term capital
gain of $1,545,700.3 In the calculation of the Massachusetts corporate
ex-cise, the taxpayer was obliged to calculate its income in accordance with chapter 63, section 30(5)(a), which incorporates the federal definition of "gross income"• and chapter 63, section 30(5)(b), which defines "net in-come" for state tax purposes.' The precise amount of the income portion of the excise tax was calculated in accordance with chapter 63, section 38(a)(2),
which adopted the federal definitions as to gross and net income. 6 The
crucial portion of the statute, for the taxpayer's purposes, required inclu-sion of one-half of "the long-term capital gains realized . . . from the sale or exchange of capital assets . . . to the extent includable in taxable net
in-come reported to the federal government . . . . "7
• Id. at 679, 417 N.E.2d at 969 (citations omitted). • Id.
§ 16.6. ' 1981 Mass. Adv. Sh. 77, 415 N.E.2d 825.
' Id. at 78, 415 N.E.2d at 826-27. ' Id. at 78, 415 N.E.2d at 826.
• G.L. c. 63, § 30(5)(a) defines gross income as "gross income as defined under the provi-sions of the Federal Internal Revenue Code, as amended and in effect for the taxable year
"
' "Net income" is defined by G.L. c. 63, § 30(5)(b) as "gross income less the deductions, but not credits allowable under the provisions of the Federal Internal Revenue Code, as amended and in effect for the taxable year. Deductions with respect to the following items, however, shall not be allowed:- . . . (ii) losses sustained in other taxable years . . . . "
• 1981 Mass. Adv. Sh. at 80 n.7, 81, 415 N.E.2d at 827-28 n.7, 828. ' G.L. c. 63, § 38(a)(2). The provision states in relevant part:
4S4 1981 ANNUAL SURVEY OF MASSACHUSETTS LAW § 16.6
In calculating its net taxable income under chapter 63, the taxpayer
sought to use a figure other than the capital gain reported on its federal return. In the taxable year, the federal figure had been adjusted downward by some $491,403.' The figure used by the taxpayer was in accordance with unique federal provisions requiring application of a carry-over loss from deductions not taken in prior tax years.' Thus, in reporting its net taxable income on its Massachusetts corporate excise return, the taxpayer sought to use a net income tax figure made artificially low because of the application of a capital gains figure substantially higher than the amount of capital gains reported to the federal government.
The taxpayer advanced two arguments to support its position, both re-jected by the Appellate Tax Board and the Supreme Judicial Court. The taxpayer initially argued that the state statutes may be interpreted to allow its method of determining state tax liability. The taxpayer suggested that, since chapter 63, section 30(5)(b)(ii) forbids prior loss carry-over as a matter of state law, the federal law provisions adjusting its basis downward because of prior loss carry-over should be disregarded for purposes of a
state tax calculation. 10 The Court rejected this argument noting that it is not
unusual for the state to use a federal tax benchmark while at the same time
''carving out peculiar variations to further the State's tax policies.'' 11 Here,
the Court declared that it was fully appropriate for the state to prohibit prior year loss cari')'-over, while at the same time employing a federal capital gains figure in the calculation of state taxable income which, for federal tax purposes, had been adjusted downward because of the same
carry-over loss.12 The Court therefore concluded that there was nothing
in-consistent in the mechanism employed by the state statutory scheme. The taxpayer also challenged the Board's decision as an improper delega-tion of state taxing authority to the federal government. The Court plainly stated that the "prospective incorporation of federal tax law does not
con-stitute impermissible delegation of legislative authority," 13 observing that
although federal action "may influence the amount of the tax payable,
. . . the taxing power has not been delegated" to the federal government. 14
The Court also discussed the relation of federal tax laws to chapter 63,
section 22A. 1' The Massachusetts statute requires a domestic insurance
' 1981 Mass. Adv. Sh. at 78, 41S N.E.2d at 826-27.
• Id. at 79 n.6, 41S N.E.2d at 827 n.6 (citing Treasury Regulation § 1.1502-32).
•• /d. at 81, 41S N.E.2d at 828. 11 /d. at 82, 41S N.E.2d at 829. 12 /d. at 82-84, 41S N.E.2d at 829-30.
" /d. at 87, 41S N.E.2d at 831.
•• /d. See First Federal Savings and Loan Association v. State Tax Commission, 372 Mass. 478, 363 N.E.2d 474 (1977).
§' 16.6 STATE AND LOCAL TAXATION 455
company to calculate its excise as a figure equal to one percent of its total gross investment income, as reported to the Commissioner of Insurance on
its annual statement of financial condition. 16 In a rare reversal of an
Appel-late Tax Board decision, the Court in
Commissioner of Revenue
v.Massa-chusetts Mutual Insurance Co.,
17 determined that it was inappropriate forinsurance companies to exclude from the excise calculation certain items
in-cluded in the annual statement to the Insurance Commissioner, but which the companies believed were not properly characterized as gross investment income in the tax sense.
The essential holding of the
Massachusetts Mutual
case was that it wasfully appropriate for the legislature to make an insurance company's finan-cial statement to the Insurance Commissioner a benchmark for determining
the excise due for the privilege of doing business in Massachusetts.11 Thus,
the Court rejected the companies' argument that the use of the annual financial statement to determine the excise amounted to an improper delegation· of authority to the Insurance Commissioner. Relying on deci-sional law permitting reliance on the federal tax scheme to determine the
state tax due, u the Court reiterated the now firmly established rule that
while the action of other entities (such as the Insurance Commissioner) "may influence the amount of tax payable, . . . the taxing power has not been delegated to them." 20
Every domestic insurance company coming within the scope of the definition of a do-mestic company in section one of chapter one hundred and seventy-five, except life in-surance companies as defined in section one hundred and eighteen of said chapter one hundred and seventy-five, which are also life insurance companies as defined under sub-section (a) of sub-section 801 of the Federal Internal Revenue Code, as amended, and in ef-fect for the taxable year, shall annually pay, as part of its excise imposed under this chapter, an amount equal to one percent of its total gross investment income earned during the preceding calendar year, as reported in its annual statement for said year filed with the commissioner of insurance and as shown in Exhibit 3 of said statement for a life insurance company or in Item 10, Column 8, Part 1, of the Underwriting and In-vestment Exhibit for any other domestic insurance company.
" G.L. c. 17S, § 2S provides in relevant part:
Every company shall annually, on or before March first or sixty days from such date authorized by the commissioner, file with the commissioner a statement showing its fi-nancial condition on December thirty-first of the previous year or such other date as the commissioner may authorize for such company, and its business of that year. The com-missioner may, for cause shown, extend the filing date of the annual statement, or of schedules or exhibits which are a part of such statement or which are required by the commissioner, for not more than sixty days beyond March first or the date authorized by the commissioner in said year.
" 1981 Mass. Adv. Sh. 2233, 428 N.E.2d 297. 11 /d. at 2235-39, 428 N.E.2d at 300-02.
" See, e.g., Parker Affiliated Cos. v. Department of Revenue, 1981 Mass. Adv. Sh. 77, 87, 41S N.E.2d 82S, 831; First Federal Savings & Loan Ass'n v. State Tax Commission, 372 Mass. 478, 491, 363 N.E.2d 474, 483 (1977).
